Unit 4 Strategic interactions and social dilemmas

4.9 Using experiments to study economic behaviour

Understanding people’s motivations (altruism, reciprocity, inequality aversion, as well as self-interest) is essential to being able to predict how they will behave as employees, family members, custodians of the environment, and citizens.

Economists use experiments—like the public good experiment in the previous section—to observe behaviour under controlled conditions.

The nineteenth century scientist (and monk) Gregor Mendel used controlled experiments to discover the laws of genetic inheritance. He systematically cross-bred pea plants with different characteristics, and then observed and measured seven characteristics of each plant. We cannot hope to explain human behaviour with seven measurements; nevertheless, economists use a similar approach to identify the factors that matter for economic decision-making, and to infer the preferences underlying people’s decisions.

Experiments are designed to be as realistic as possible, while controlling the conditions in which decisions are made. Then the experimenter can observe how decisions change when just one of the conditions is changed and all others are held constant. Therefore, in the public good experiment:

  • Exactly the same experiment was conducted in all the cities.
  • All participants in the experiment were university undergraduates, with similar ages and sociodemographic backgrounds.
  • Every participant received the same instructions and information about the experiment.
  • Interactions were computer-mediated and took place anonymously.
  • Decisions had real consequences: each participant earned an amount of money equal to the total of their own pay-offs at the end of the experiment.

To isolate the effect of an option for players to punish others if they thought their contributions to the public good were too low, the participants were split randomly into a treatment group, who played the game with the option of punishment, and a control group, who did not have this option.

Many universities have computer laboratories where ‘lab experiments’ like this one are conducted, often with student participants. Juan Camilo Cárdenas, an economist at the Universidad de los Andes in Bogotá, Colombia, performs experiments about social dilemmas with people who are facing similar problems in their real life, such as overexploitation of a forest or a fish stock.

For a summary of the kinds of experiments that have been run, the main results, and whether behaviour in the experimental lab predicts real-life behaviour, read the research done by some economists who specialize in experimental economics. For example, Colin Camerer and Ernst Fehr,1 Armin Falk and James Heckman,2 or the experiments done by Joseph Heinrich and a large team of collaborators around the world.3

The way people behave in experiments can predict how they react in real-life situations. For example, fishermen in Brazil who acted more cooperatively in an experimental game also fished more sustainably than the fishermen who were less cooperative in the experiment.

Question 4.10 Choose the correct answer(s)

According to the ‘Economist in action’ video of Juan Camilo Cárdenas, which of the following have economists discovered using experiments simulating public goods scenarios?

  • The imposition of external regulation sometimes erodes the willingness of participants to cooperate.
  • Populations with greater inequality exhibit a greater tendency to cooperate.
  • Once real cash is used instead of tokens of hypothetical sums of money, people cease to act cooperatively.
  • People are often willing to cooperate rather than free-ride.
  • Professor Cárdenas mentions this finding in the video.
  • Professor Cárdenas finds that populations with greater inequality exhibit less trust and cooperation.
  • Cooperative behaviour occurs even when experimental participants are offered real cash, as in Professor Cárdenas’s experiments.
  • Professor Cárdenas mentions this finding in the video.

Exercise 4.10 How valid are laboratory experiments?

In 2007, Steven Levitt and John List published a paper called ‘What Do Laboratory Experiments Measuring Social Preferences Reveal About the Real World?’. Read the paper to answer these two questions.

  1. According to their paper,4 why and how might people’s behaviour in real life vary from what has been observed in laboratory experiments?
  2. Using the example of the public goods experiment, explain why you might observe systematic differences between the observations recorded in Figures 4.14a and 4.14b, and what might happen in real life.

Field experiments

Economists also conduct experiments ‘in the field’: deliberately changing the economic conditions under which people make real decisions, and observing how their behaviour changes. An experiment conducted in Israeli day care centres in 1998 demonstrated that social preferences may be very sensitive to past experience.

It is common for parents to rush to pick up their children from day care. Sometimes parents are late, causing a negative effect on staff who have to work longer. What would you do to deter parents from being late?

Two economists ran a field experiment introducing fines in some day care centres (the treatment group) but not others (the control group). The ‘price of lateness’ went from zero to ten Israeli shekels (about $3 at the time) depending on how late a parent was. Figure 4.15 shows what happened. Surprisingly, after the fine was introduced, the frequency of late pickups doubled.

In this line chart, the horizontal axis shows time period, ranging from 1 to 20, and the vertical axis shows the average number of parents arriving late, ranging from 0 to 22. Fines were introduced in period 5 and ended in period 17. Two lines show the average number of parents arriving late in centres where the fine was introduced and centres where the fine was not introduced, respectively. The average number of late parents were similar across both types of centres until period 5, ranging from 7 to 11. From period 6 onwards, the average number of late parents stayed steady at 7 to 11 for centres where the fine was not introduced, but increased permanently in centres where the fine was introduced, ranging from 16 to 21.
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Figure 4.15 Average number of late-coming parents, per week.

Uri Gneezy and Aldo Rustichini. 2000. ‘A Fine Is a Price’. The Journal of Legal Studies 29 (January): pp. 1–17.

Why did putting a price on lateness backfire?

One possible explanation is that before the introduction of fines, most parents were on time because they felt that it was the morally right or responsible thing to do, to avoid inconveniencing the day care staff. Perhaps they felt an altruistic concern for the staff, or regarded a timely pickup as a reciprocal responsibility in the joint care of the child.

But the imposition of the fine signalled that the situation was really more like shopping. Lateness had a price and so could be purchased, like vegetables or ice cream.5 If you paid the price, you had the right to be late, without consequence.

In this article, Nobel Prize winner Esther Duflo explains how field experiments, also known as randomized control trials, can influence government policy.

crowding out, crowded out
There are two quite distinct uses of the term. One is a negative effect that is observed when economic incentives displace people’s ethical or social motivations. In studies of individual behaviour, incentives may have a crowding out effect on social preferences. The second use of the term is to refer to the effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest rate.

The use of a market-like incentive—the price of lateness—had provided what psychologists call a new ‘frame’ for the decision, changing it so that self-interest rather than concern for others was acceptable. Even worse, Figure 4.15 shows that when the fine was removed, parents continued to pick up their children late. They seemed to have permanently adjusted their view of what was socially acceptable. They learned that it is acceptable to be late and updated their preferences accordingly. When fines and prices have these unintended effects, we say that incentives have crowded out social preferences.

Question 4.11 Choose the correct answer(s)

Figure 4.15 depicts the average number of late-coming parents per week in day care centres, where a fine was introduced in some centres and not in others. The fines were eventually abolished, as indicated on the graph.

Based on this information, read the following statements and choose the correct option(s).

  • The graph shows that the market-like incentive has been an effective way of reducing late-coming parents. The introduction of the fine successfully reduced the number of late-coming parents.
  • The fine can be considered as the ‘price’ for collecting a child.
  • The graph suggests that the experiment may have permanently increased the parents’ tendency to be late.
  • The crowding out of the social preference did not occur until the fines ended.
  • The graph shows that the number of late-coming parents more than doubled in the centre where the market-like incentive (the fine) was introduced.
  • The parents paid the fine if they were late and not otherwise. So it can be considered as a price for lateness.
  • The graph shows that the number of late-coming parents remained high after the fine was abolished, so it is possible that the experiment had a permanent effect.
  • The crowding out of social preferences occurs when the moral obligation of not being late is replaced by the market-like incentive of purchasing the right to be late without ethical qualms. This result is evident in the graph immediately after the introduction of the fines.
  1. Colin Camerer and Ernst Fehr. 2004. ‘Measuring Social Norms and Preferences Using Experimental Games: A Guide for Social Scientists’. In Foundations of Human Sociality: Economic Experiments and Ethnographic Evidence from Fifteen Small-Scale Societies, eds. Joseph Henrich, Robert Boyd, Samuel Bowles, Colin Camerer, and Herbert Gintis. Oxford: Oxford University Press. 

  2. Armin Falk and James J. Heckman. 2009. ‘Lab Experiments Are a Major Source of Knowledge in the Social Sciences’. Science 326 (5952): pp. 535–538. 

  3. Joseph Henrich, Richard McElreath, Abigail Barr, Jean Ensminger, Clark Barrett, Alexander Bolyanatz, Juan Camilo Cárdenas, Michael Gurven, Edwins Gwako, Natalie Henrich, Carolyn Lesorogol, Frank Marlowe, David Tracer, and John Ziker. 2006. ‘Costly Punishment Across Human Societies’. Science 312 (5781): pp. 1767–1770. 

  4. Steven D. Levitt, and John A. List. 2007. ‘What Do Laboratory Experiments Measuring Social Preferences Reveal About the Real World?’ Journal of Economic Perspectives 21 (2): pp. 153–174. 

  5. Samuel Bowles. 2016. The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens. New Haven, CT: Yale University Press.